Filling the Swamp Isn’t Draining it!

President Trump may be a teetotaler but when it comes to corn alcohol he is all in and in a big way. Instead of draining the swamp, he is filling it with ethanol by pandering to corn state senators by backing off from abolishing the renewable fuel standard.

The ethanol mandate originated in the 1990 Clean Air Amendments and was added as a way of buying agriculture’s support. It was not needed for clean air purposes then and it is not needed for greenhouse emission reductions now. It’s only benefit is to enrich corn farmers and ethanol manufacturers. At the time of the Clean Air debate, the oil and auto industries urged Congress to set tailpipe emission standards and let the two industries work together to meet them. Instead, Congress wrote a formula for gasoline into legislation. When the ethanol mandate switched from being about clean air to climate change, advocates claimed that it would result in lower greenhouse gas emissions. The evidence demonstrates the opposite.

In 2005 when gasoline demand was rising, Congress tried to deal with complaints about the ethanol tax credit by mandating annual volumetric requirements. Of course, shortly thereafter gasoline demand peaked. EPA attempted to raise the current 10% per gallon limit which would have voided many new car warranties and later attempted to reduce the annual volume requirement but was rebuffed by a court. Congress could have simply ended the volumetric requirement but the ethanol lobby has proven too powerful. No matter which party controls Congress, it needs support from agricultural representatives and the environmental lobby to pass legislation, so nothing happens.

With 40% of the domestic corn crop being dedicated to ethanol production, the effect has been to drive up the prices of food products that are based on corn. The ripple effect of higher prices has an especially harmful impact on people in countries where corn based food is a basic commodity. In addition, the ethanol mandate also means higher gasoline prices, especially in the summer when congressionally mandate reformulated gasoline is required.

To ensure compliance with the renewable fuel standard, EPA created a tracking system of renewable identification numbers—RINs—that are assigned to each gallon of biofuel. Blenders of gasoline are required to have enough RIN credits for each gallon of gasoline they sell. If they don’t have enough credits, they have to buy them. And, since in recent years the volumetric mandate has exceeded the demand for gasoline, refiners have had to buy additional credits for fuels that did not exist, driving up the price of credits and gasoline. Hence, regulatory compliance created a market in credits that would increase in value.

Anytime there is a trading market, Wall Street speculators will find a way to become involved and make money in the process. Credits created for compliance purposes quickly became a commodity that could be bought and sold like any other commodity.

This is a classic example of the Bootlegger and Baptist theory of public choice. Farmers, ethanol manufacturers, and now traders align themselves with environmentalists who are wedded to biofuels to enriched themselves by selling a product that is not needed.